Credito Emiliano Falls on Estimate for Higher Operating Costs

Apr 11, 2014 5:55 am ET

April 11 (Bloomberg) -- Credito Emiliano SpA dropped as much as 5.5 percent in Milan trading after General Manager Adolfo Bizzocchi estimated operating costs may increase 3 percent to 4 percent in 2014.

The shares fell 5.4 percent to 7.36 euros by 11:50 a.m. in Milan, trimming the gain over the past 12 months to 80 percent. That compares with a 17 percent advance in the Bloomberg Europe Banks and Financial Services Index, which tracks 43 companies.

Costs may rise because of investments in personnel training, a performance-based compensation plan, and technology, Bizzocchi said in an interview at the bank’s headquarters in the northern city of Reggio Emilia. Bizzocchi plans to hire corporate and private bankers and may reach 50 employees in those areas by the end of the year.

“Cost inflation is higher than the 1.5 percent increase we were anticipating,” Luigi Tramontana, an analyst at Banca Akros, wrote in a note to clients today. Tramontana cut his rating on the shares to reduce from hold, leaving the target price unchanged at 6 euros.

Revenue is also set to increase, Bizzocchi said. He expects revenue to exceed 1 billion euros ($1.4 billion) this year, up 3 percent to 4 percent from 2013 as net interest income “is expected to be close to last year’s level due to an ongoing reduction of riskier, though more remunerative assets.”

Higher Revenue

“A 6 percent to 7 percent increase in our non-interest income will drive revenue higher as we will be able to leverage on a wider product range and customer base,” said Bizzocchi.

Bizzocchi, 60, is seeking to improve the quality of assets and to finance growth, as the bank is one of 15 Italian lenders being reviewed by the European Central Bank as part of a three- stage comprehensive assessment.

“I will not ask shareholders to inject money,” said Bizzocchi. “Eventual higher profitability will be used for investments and to finance the bank’s growth, so I expect 2014 net income and the dividend in line with last year.”

Credito Emiliano’s net income declined 4 percent to 116 million euros in 2013 as it set aside more money for bad loans and earned less from lending and trading. The bank, which distributed a dividend of 12 cents a share, reported 2013 revenue of 984 million euros.

Bizzocchi ruled out acquisitions and is focusing on internal growth by increasing market share in lending and deposits. Credito Emiliano may take advantage of “investors’ appetite for Italian assets, tapping institutional investors for funding through the additional issue of covered bonds,” the general manager said.

Asset Review

The bank had a common equity Tier 1 ratio, a key measure of financial strength, of 10.4 percent at the end of March, up from 9.9 percent at the end of 2013, the executive said. He expects the lender to emerge from the ECB’s asset review with a clean bill of health.

Euro-area banks are undergoing the unprecedented review of assets as part of preparations for a new single supervisory body led by the Frankfurt-based central bank. The exercise, aimed at restoring confidence in bank balance sheets to spur lending, is due to culminate in stress tests based on the new asset data, with complete results to be published in October.

A team of 50 employees is dedicated to the asset review, said Bizzocchi, while nine inspectors of the Bank of Italy and two external auditors are examining the bank’s balance sheet.

The bank’s capital will rise by about 1.5 percentage points as it adopts an internal model for calculating credit risk. The accounting model, which has already been implemented by the country’s two biggest lenders, UniCredit SpA and Intesa Sanpaolo SpA, may be approved by the Bank of Italy as soon as this year, according to Bizzocchi.

Cheese Collateral

Credito Emiliano’s biggest shareholder is the Maramotti family -- the owner of the Max Mara fashion group -- which holds an indirect 28 percent stake in the bank. Bizzocchi said he doesn’t expect the family to reduce its holding in the lender.

The bank finances cheese makers in northern Italy, accepting parmesan as collateral for loans. Credito Emiliano’s two climate-controlled warehouses hold about 450,000 wheels worth about 160 million euros, according to the bank.

The bank offers loans to the producers for as long as 30 months, equal to the time it takes the parmesan to age, financing about 70 percent of the value of their product based on current market prices. Each 80-pound wheel of the parmesan is valued at more than 320 euros.